Apple, Google and the Pendulum

My late father had many folksy sayings when I was growing up. Some were hokey, but several provided a lot of solid insight into life. All were homespun and delivered sincerely, reflecting my dad's humble roots and deep reservoir of common sense. One of my favorites has always been, "Life is like a pendulum. It swings too far to the left, it swings too far to the right and it is rarely in the middle where it belongs." I have always found this advice can be applied frequently in life's journey, as well as to politics, fashion and sports. And even to the stock market.

Take the cases of Apple (AAPL) and Google (GOOG). Last summer, Apple could do no wrong. Every product it launched exceeded expectations, the stock climbed what seemed like every week and then moved above $700 a share in mid-September. It became the most valuable company by market capitalization, displacing Exxon Mobil (XOM) for a time, and analysts were busy putting price targets above $1000 on the Cupertino, Calif., juggernaut. Some even speculated on when the stock would achieve an incredible trillion-dollar market capitalization.

Google's performance was on the other end of the spectrum. It not only missed badly during its third-quarter earnings report, but a technical glitch also caused the report to be released early and these two events caused the stock to fall some 10% in one day. In addition, the company was increasingly the target of U.S. and European regulators, as well as experiencing challenges integrating its Motorola Solutions acquisition.

If you did a survey six months ago asking whether Apple or Google would have the better stock performance over the next half year, I would be willing to wager good money that Apple would have been the overwhelming consensus favorite. Naturally, the opposite happened. Over the last six months, Google's stock performance has crushed Apple's.

Over that same period, Google has done little wrong. It came through with a strong earnings report, resolved its U.S. regulatory issues, made progress within its Motorola division and even came out with a pair of cool Google glasses that cost $1500 each. As a result, the stock has shown solid performance over the last six months and has received many analyst upgrades.

Apple, on the other hand, cannot get out of its own way fast enough. Its Apple Maps launch was a technical and public relations disaster, its margins have come down with recent product launches, and analysts consistently offer negative, sometimes outrageous, commentary while lowering price targets on the shares.

If the same survey was done right now on which stock would outperform the other over the next six months, what do think the result would be? I believe Google would be the hands-down choice of investors. Could they turn out to be right? Of course they could, but the opposite will happen again. Sentiment on Google is very high right now and its valuation has increased nicely over the last half year. Any bad news or slip-up could affect the shares significantly.

Apple, on the other hand, has such negative sentiment it is hard to see it getting much worse. The shares sell at less than 7x forward earnings once you subtract the company's massive amount of cash and short-term securities. It is also very likely to make a substantial increase to its dividend payout in the next few months, even as it again disappointed some investors by not making that announcement at the shareholder meeting Wednesday. I also believe the activists have gotten management's attention now and I would expect other shareholder-friendly moves by the company in 2013. I don't know what will be the catalyst (a stock split, new product launch, or partnership agreement with China Mobile) to reverse Apple's recent slide, but I am confident it will happen soon.

Anecdotally, I went to the Dadeland Mall in Miami this weekend to pick up a few items and meet a friend for lunch. The Apple Store was by far the busiest in the 200-store mall. It was like swimming upstream with the salmon during mating season as two dozen Apple Geniuses scurried to help customers and answer their questions. This is not a sign that the company's products are losing any of their popularity or seeing ebbing demand. Watch that pendulum closely; it is ready to swing back.

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